According to the latest Monthly Treasury Statement, in June, the US collected $225BN in tax receipts - consisting of $110BN in individual income tax, $91BN in social security and payroll tax, $4BN in corporate tax and $20BN in other taxes and duties- a drop of 2.9% from the $232BN collected last July and a reversal from the recent increasing trend...

... and in July, the 12 month trailing receipt total was barely higher compared to a year ago, up just 0.4% Y/Y after rising as much as 3.1% at the end of 2017.

Meanwhile Federal spending rose, up 9.9% from $275BN last July to $302BN last month.

... where the money was spent on social security ($83BN), defense ($49BN), Medicare ($24BN), Interest on Debt ($35BN), and Other ($111BN).

This resulted in a July budget deficit of $77 billion, in line with expectations, and a signification deterioration from the $43 billion recorded in July of 2017.

The July deficit brought the cumulative 2018F budget deficit to over $684BN during the first 10 month of the fiscal year, up 28% over the past year.

This is the highest 12 month cumulative deficit since May 2013; as a reminder the deficit is expect to increase further amid the tax and spending measures, and rise above $1 trillion as soon as next year.

Most Wall Street firms forecast a deficit for fiscal 2018 of about $850 billion, at which point things get... much worse. As we showed In a recent report, CBO has also significantly raised its deficit projection over the 2018-2028 period.

But while out of control government spending is clearly a concern, an even bigger problem is what happens to not only the US debt, which recently hit $21.3 trillion, but to the interest on that debt, in a time of rising interest rates.

As the following chart shows, US government Interest Payments are already rising rapidly, and just hit an all time high of $538 billion in Q2 2018.

Interest costs are increasing due to three factors: an increase in the amount of outstanding debt, higher interest rates and higher inflation. Needless to say, all three are increasing; furthermore, a rise in the inflation rate boosts the upward adjustment to the principal of TIPS, increasing the amount of debt on which the Treasury pays interest, turbocharging the amount of interest expense.

The bigger question is with short-term rates still just around 2%, what happens when they reach the mid-3% as the Fed's dot plot suggests it will?